Weak Job Market: Still a Drag on Consumer Companies

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We believe that at some point, this will likely allow airlines to nudge fares higher, and there have been some moves in that direction. This may help as airlines enter the winter season, when, with the exception of holiday travel periods, revenues tend to be lower in absolute terms than in the spring and summer.

Yet even as rising fuel costs may add to the pressure on airlines—and as many of the large carriers continue to lose money—the outlook isn't one of abject pessimism. Amid signs of a nascent economic recovery, combined with the ability of many airlines, such as AMR's (AMR) (S&P credit rating, B-) American Airlines and UAL's (UAUA) (B-) United Airlines, to raise money in the capital markets, we see reasons for hope that the industry will survive until there is a sustained decline in unemployment and a loosening of consumers' purse strings.

Carmakers: More Speed Bumps Along the Way

Although October's sales figures provided carmakers with some cause for optimism as well as evidence that the auto market was beginning to recover from the bottom it hit earlier this year, our projections for annual sales suggest that companies face a slow recovery at best.

After the federal government's cash-for-clunkers program inflated sales in July and August, with sales climbing to an annualized rate of 14.4 million units, car purchases dropped to an annualized 9.2 million in September before rebounding to 10.4 million units last month. Still, our forecast for sales this year of 10.2 million vehicles represents a sharp decline from the highs of around 17 million from 2000 through 2006 (with 2007 sales slipping somewhat to 16.1 million).

Even an increase to our expectation of 10.9 million unit sales in 2010 would put sales down nearly 40% from the peak in 2000, which is still below the so-called scrappage rate (generally estimated at roughly 12 million a year)—the number of vehicles that come out of service because of age or damage.

Most consumers buying new vehicles still need financing, and credit isn't necessarily there for all types of borrowers. Even if potential buyers can get credit, they may be reluctant to take on debt until the U.S. job market and economy turn around in earnest. Historically, vehicle sales closely track the unemployment rate and consumer confidence levels. On the plus side, used vehicle prices have surged to a record high after rising every month this year, which alleviates some pricing pressure on new cars and translates into more money on trade-ins for potential new-car buyers. But we expect used vehicle prices to fluctuate rather than remain stable at high levels.

Even if sales levels do increase and then normalize in the next few years, S&P remains concerned about carmakers' profitability because of overcapacity and increasing regulations for emissions and fuel economy, among other factors.

Technology: Ahead of the Curve

Not all industries have it quite as bad as most. Amid a significant downturn in technology spending—one that has affected both the enterprise and consumer businesses—there is some good news. Forecasts earlier in the year for sales declines in home PCs and handsets have proven too pessimistic, and Microsoft's (MSFT) (AAA) introduction of its Windows 7 operating system may give a short-term boost to home computer sales.

In addition, the growing popularity of the small laptop computers known as netbooks as well as low-priced desktop models have helped to spur sales. Naturally, this has lowered average selling prices—and we still expect dollar volume declines across electronics, handsets, and PCs. That said, we expect some growth in 2010, if only a relatively modest amount."Consumers can only defer their purchases for so long, and we may see a short-term spike in sales," says S&P Managing Director William Wetreich. "Overall, the tech space has stabilized."

Waiting for the Turnaround

As the federal government's various stimulus actions work their way through the U.S. economy and signs of a rebound emerge, consumer-driven industries face a long road to recovery. Consumer spending is unlikely to increase in any sustainable way until Americans enjoy greater job security and unemployment begins to subside in earnest. The wealth effect created by rising stock markets may not be enough to spur spending this time around. Until then, retailers and other consumer-dependent businesses face the daunting task of preparing for an uncertain future.

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